What you should know before signing a building contract

Building Contracts

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What you should know before signing a building contract

While the design of your home or property development might seem like the most important element of the project – it isn't. The building contract is because it will legally outline the myriad aspects of the project so that everyone is on the same page from the very beginning.

A contract should apply to every construction project – from a small bathroom renovation to the construction of your dream home.

That's because all parties need to work to a written roadmap with clear guidelines and rules on issues such as:

When the work is to be completed

The scope of works

The contract price

How and when payment is to occur

What happens if there are delays

How to manage variations.

You should always seek your own independent legal advice before signing a building contract – no matter how small the project is. In Australia, you should sign a domestic building contract with a builder or tradesperson for any works valued over $5,000.

Projects that require a building contract generally include when you're erecting or constructing:

a home including any landscaping, paving, fixtures associated with the home,

retaining walls,

garages,

driveways,

fences,

workshops,

swimming pools,

the provision of lighting, heating, ventilation, air-conditioning, water supply, sewerage or drainage to the home or property,

renovations, alterations extensions, improvements and repair of a home,

demolition and removal of a home,

any work associated with the construction of a building on land that is zoned for residential purposes,

preparations of plans and specifications for carrying out of works

your contract for works is more than $5,000 – even if you are given separate quotes from the same builder for different stages of the works

What is a five-day cooling off period?

When signing a building contract, you're then legally entitled to a five business day cooling period – which means that you have that period of time to legally withdraw from the contract without penalty.

Before construction begins, your builders must ensure that the site is suitable for the proposed works and have all the necessary information and paperwork, such as soil and geotech reports as well as building and planning permits, to allow the project to begin.

What about Prime Cost and Provisional Sum items in the contract?

Most people only undertake one or two building projects in their lifetimes, so it makes sense that a building contract can seem confusing.

One element of building contracts that often causes disputes is the inclusion of prime cost and provisional sum items.

To clarify, prime cost items are fixtures or fittings (such as a kitchen), which haven't been priced prior to the building contract being signed. Prime cost item estimates are usually included because the exact make, model, or selection of items hasn't been finalised before the contract signing.

Likewise with provisional sums, which are an estimate of the costs of carrying out particular works outlined in the contract, such as excavation works. The theory is that the builder doesn't know what the excavation may find and therefore it may be more costly than anticipated.

In our opinion, it is best to avoid both prime cost and provision sum items in your building contract. The way to do that is to have completed all required costings of fixtures and fittings as well as soil testing reports prior to signing the contract. Forearmed is forewarned after all.

Another element of a building contract that you must understand before signing it is if it's a cost-plus contract.

A cost-plus building contract is where the cost of the building project is not determined at the time of contract signing.

The bottom line

While building contracts might seem complex, they don't have to be scary or full of nasty surprises.

Working with a professional and ethical builder will ensure that the building contract is fair and reasonable for both parties – and that your right to seek independent legal advice prior to signing it is thoroughly supported and encouraged.

Unscrupulous builders have been known to use this type of contract to increase the profit they will receive at the end of the project.